EUR 850.00 For Business Accounts Only

Morningstar | Dollar General's Scale and Convenience Should Protect Its Returns Despite Competition

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General's advantageously located store network, low-priced items, and leverageable supply and distribution capabilities should allow the company to deliver economic returns. With its footprint that focuses on thinly populated areas that cannot support numerous retailers and makes shipments to homes costly for a small basket (over 80% of items are priced at or below $5), we expect Dollar General to use its burgeoning scale and proximity to customers to economically deliver the convenience and low price points that its generally modest-income (roughly $40,000 annually, as a household) customers demand.Dollar General relies on branded and unbranded consumables (78% of fiscal 2018 sales) to bring people into stores, with other categories boosting margins and ticket growth. We support its recent moves to introduce a rapidly changing nonconsumable assortment, providing a treasure-hunt experience that helps drive traffic in a way that we believe is difficult for online-only retailers to replicate. Efforts to add coolers and boost its health and beauty offerings should help make Dollar General locations more attractive to customers by concentrating a wide variety of essentials in a conveniently located store; about 75% of Americans live within 5 miles of a Dollar General.Despite its physical nature, Dollar General has wisely embraced the digitization of retail, including its mobile app, which features digital coupons (simultaneously generating valuable shopper behavior data) as well as a 2018 pilot of scan-and-go checkout in select stores, which we believe can add to the convenience element of the firm's value proposition while reducing labor costs as minimum wages rise.Still, switching costs are negligible, forcing Dollar General to face intense competition from convenience stores, mass merchandisers, hard discounters, grocery stores, pharmacy chains, and online retailers (Amazon). The crowded landscape puts a premium on execution, a challenge that management has largely met thus far but requires the firm to remain agile as customers' demands change.